The release of the model GST law by the ministry of finance on conclusion of the meeting of state finance ministers appears to suggest a possible breakthrough on the deadlock over GST among the Centre and states. This brings a ray of hope for industry which has been awaiting the GST regime for a long time now. The model law has wholeheartedly endeavoured to deliver some of the benefits that were being expected from GST, including zero rating of exports, end of dual taxation on intangibles, and deemed sale transactions such as works contract, construction, catering, etc, by treating them as services, free flow of credits, to name a few.
GST being a destination-based tax provides taxing right to the state in which goods or services are ultimately consumed by the final consumers. The model GST law appears to have done justice to this principle by laying down a clear point of taxation and place of supply rules. GST is a dual levy and, therefore, it becomes critical to identify local versus interstate supplies for an equitable distribution of revenue among the Centre and states. Interestingly, the place of supply rules for services have been drafted in a manner which requires categorisation of services as B2B or B2C in every case. This is not unusual when compared with GST laws in other parts of the world such as the EU, Australia, etc. This could, however, place an onerous requirement on all service providers to maintain records for their customers in case of B2C supplies, going forward.
In contrast to the current tax regime where taxable event is ‘manufacture’ and ‘sale’ of goods and services, the model GST law seeks to impose tax on ‘supply’ of goods and services. This should bring an end to the concept of deemed manufacturing which calls for levy of excise duty on undertaking activities such as relabelling, repacking and branding of goods. The scope of the term ‘supply’ has been kept wide enough to tax even the supplies without consideration under certain cases including supplies by a taxable person to another taxable/non-taxable person in the course of or furtherance of business. This could potentially bring freebies offered to customers, promotional offers and inter-branch transfers under the levy of GST.
The essence of GST lies in seamless flow of input tax credit (ITC) throughout the supply chain. The model GST law seeks to have categorically addressed this aspect by thinning down the list of exclusions from the scope of ITC. The concept of input service distributor (ISD) has been retained for distribution of credits on services procured by one establishment to another or more than one establishments of the same legal entity depending on the establishment to which such input services are attributable. This may prove to be a useful mechanism for transfer of accumulated credits by one unit to another in case of centralised procurement of services. For sustainability of centralised procurement model that is followed in many industries, it is imperative that similar facility of credit distribution on goods across establishments is allowed under the GST law. Further, provisions allowing refund of accumulated ITC by a dealer facing inverted duty structure could be another major attraction of GST for businesses.
Conversely, certain provisions relating to ITC may act as a deterrent in smooth flow of credits. Much against industry’s expectations, credit restrictions in respect of motor vehicles, construction of immovable property and services for benefit of employees have been continued under the model GST law. Further, the law places onus upon buyer to justify the ITC claims including payment of tax to the credit of government by the supplier.
Hence, payment defaults by any one person in the supply chain may cause denial of credits to others. The time limit for claiming ITC has been borrowed under GST as well. The restriction could vary anywhere from six months to 18 months, depending upon the date of supporting invoice.
The model GST law also throws some other fresh challenges, such as valuation principles for goods and services in line with current Customs Valuation Rules based on value of ‘similar’ or ‘identical’ goods/services. Related-party transactions in respect of services would now be subject to detailed scrutiny to ascertain their arm’s length price.
Other challenges include time of supply being tagged to earlier events involving removal, invoice, payment or receipt of goods/services by the recipient, obligation on e-commerce operators to remit tax (TCS) to government out of payments due to suppliers, stringent penal provisions and so on. Certain compliances such as invoice level information to be provided in returns, identification of place of supply in each invoice, standard HSN or accounting codes based classification for goods or services, etc, could prove to be quite onerous for taxpayers, specifically service providers. Nevertheless, the industry will need to wait for further changes in the model law prior to its finalisation, and the fine print of delegated legislations—GST rules and central and state government notifications, etc—before making a judgement call on ease of undertaking tax compliances under the fresh law.
Overall, the model GST law provides much needed clarity on the likely GST framework that would be implemented as and when GST in India sees the light of the day. Robust IT systems, effective vendor management, working capital management and a well-designed procurement and supply chain are a must under GST. The presence of an independent GST Council would, expectantly, ensure that no substantive changes in the GST law are permissible to any individual, state or central government, which would ensure uniform tax rates and provisions pan-India. The model GST law with uniform creditable taxes cross-country also provides a great opportunity to businesses for structuring supply chain based on operational effectiveness rather than for tax efficiency reasons.
In a nutshell, the model GST law sends out a strong message that while the industry must eagerly wait to tap the opportunities being offered by GST, meticulous planning and preparedness of industries for the new regime is inevitable. This includes timely evaluation of key advocacy areas before the GST Council and making use of certain advantageous provisions in the model GST law, such as advance ruling, the scope of which is proposed to be extended to cover seeking clarity on implications of the new law on existing businesses as well.
(With inputs from Poonam Harjani, Nimisha Chaudhary & Himanshu Gupta)
The author is leader, Indirect Tax, BMR & Associates LLP